Daily Mail Group Trust (DMGT) is best known for its ownership of its media assets, namely The Daily Mail, Mail on Sunday, Ireland on Sunday, Metro and the worlds number 1 online newspaper MailOnline. But from an investors point of view DMGT is known for its immense success. Since listing in 1932 it has never asked investors for an additional penny of capital – meaning the current market capitalisation of £2.2bn and the exemplary dividend growth record (8%pa compound over the last 20 years for instance) have been funded solely by the smart reinvestment of retained earnings and prudent use of debt. Looking at the historic performance of the shares since 1998, DMGT has gone up 8-fold (excluding dividends) whilst the FT All Share is up 4.5x.
To understand DMGTs success story, you need to understand the company’s business model which is two fold. First their is the inherent cash generative nature and inflation-protection offered by a successful newspaper franchise. Next – love it or loathe it – the editorial positioning of the Mail titles has been canny. It knows its readers. Just go and look at the comments section of the MAilOnline website to see how the paper has engaged its readers. You won’t see another online website with as many comments per article as MAilOnline. And for those that follow the website and its comments section, political shocks like Brexit and Trump would have not come as a surprise. In essence, the comments section of the political articles on the websites does really capture the mood of the nation. At least this is what I have found so far.
DMGTs Intellectual property Assets
What makes DMGT particularly stand out is that it has had success in a period where the internet has fundamentally changed the newspaper business and degraded it – irreparably. This is down to a large stake held by the controlling family which has allowed the business to take a long term view. DMGT has always been alert to changes in its industry and has used the cash generated by the newspaper (and it still generates a lot) to diversify the company across a range of other Intellectual Property assets.
Two of the company’s best assets through its diversification drive are Euromoney Institutional Investor and Zoopla. To show you the financial strength of these portfolio companies, Euromoeny has a cash conversation rate of over 100% which means it turns over 100% of its operating profit into cash. This is a signal of an exceptional business. The current values of DMGT’s stakes in this pair are close to £620m and £475m respectively – in other words approx 50% of the parent’s market capitalisation. In addition, we know the new CEO of DMGT believes there is significant and under appreciated value in other subsidiaries, notably RMS – the world’s largest risk catastrophe modelling company, serving the insurance industry.
In short, when I look at the intellectual property assets the company owned and put a value on it, it is s apparent that investors currently ascribe a very low value to the newspaper hence DMGT currently trading at a low valuation. This is understandable, of course. Although in fact I suspect the Daily Mail will generate a lot more cash before it finally shuts down its presses (and that in the meantime the continuing trophy value of this newspaper is very high).
But this is not the full story. As mentioned above, The Mail has developed an online version of itself, drawing on the same editorial skills as the physical product. To say MAilOnline is a global phenomenon is an understatement. It is the most visited English-language newspaper website, with 49 million daily visitors. That represents a doubling in traffic to the site over the last 12 months. And although MailOnline is currently loss-making, it will this year generate over £100m revenues. In a world where the value of content that attracts eyeballs to devices is rising all the time, it is easily conceivable that MailOnline could be exceptionally valuable. As the CEO commented recently – “200 million minutes a day is 100 million hours a month” and “that gives you a lot of opportunities to show advertising and a lot of opportunities to generate revenues.”
My purchase of DMGT
I bought shares in DMGT via my monthly stock purchase programme. This allowed me to initiate a small stake as the dealing fee of £1.50 is extremely low.
I bought 30 shares at a price of £6.40 a piece. At these levels, I find DMGT to offer compelling value due to the reasons mentioned above. The company currently pays a dividend of 22p a share meaning my 30 shares will give me £6.60 a year in annual passive income.
Whilst the dividend yield on offer by DMGT appears low at 3.43%, it is important to note that the dividend is covered 2.55 times by operating earnings. This means that the company could easily double its dividend and still be able to comfortably fund it from earnings. Now that is a decent dividend margin of safety. This also brings up an interesting point that investor should not focus solely on the current dividend yield which merely shows the dividend as a percentage of the current stock price. Instead look at the dividend pay out ratio which shows the dividend as a percentage of earning. This way you see how much of the Earnings Per Share is actually being returned to the investor. Also, look at cashflow. Free cashflow as mentioned previously is the key to great investor returns.